Please read below: This is in part is why Newfoundland and Labrador Independent Drugstores must not sit with mass retailers.
Why CICPO must not sit at a table with the chains!
Shoppers Drug Mart Corporation
Excerpts from 2010 Annual Report
Shoppers Drug Mart Corporation is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart® (Pharmaprix®in Québec).
Leading Through Change A message from David Williams, Chair of the Board of Directors
There is no doubt that the implementation of drug system reform initiatives in Ontario and in other provinces across the country will continue to have an impact on our industry and our business into 2011 and beyond, resulting in structural changes to both the competitive landscape and the private payer market.
… we are poised to capitalize on the expected consolidation of the marketplace, which we view as another attractive opportunity to gain market share and increase profitability.
Associate-owned Store Network
As at January 1, 2011, there were 1,182 Shoppers Drug Mart/Pharmaprix retail drug stores owned and operated by the Company’s licensees (“Associates”). An Associate is a pharmacist-owner of a corporation that is licensed to operate a retail drug store at a specific location using the Company’s trademarks. The Company’s licensed stores are located in prime locations in each province and two territories, making Shoppers Drug Mart/Pharmaprix stores among the most convenient retail outlets in Canada.
The Company operates in Québec primarily under the Pharmaprix® and Pharmaprix Simplement Santé® trade names. Under Québec law, profits generated from the prescription area or dispensary may only be earned by a pharmacist or a corporation controlled by a pharmacist. As a result of these restrictions, the licence agreement used for Québec Associates differs from the Associate agreement used in other provinces.
Under the licensing arrangements, the Company receives a substantial share of Associate store profits. The Company’s share of Associate store profits is reflective of its investment in, and commitment to, the operations of the Associates’ stores.
The success of the Company and the reputation of its brands are closely tied to the performance of its Associate-owned drug stores. Accordingly, the Company relies on its Associates to successfully operate, manage and execute the retail programs and strategies of the Company at their respective locations.
The Company supports the operations of its Associates in many ways, including the provision of training and continuing education programs, as well as assistance with various administrative tasks. In addition, each Associate agrees to comply with the policies, marketing plans and operating standards prescribed by the Company, as specified in the Associate agreements with individual Associates. As well, through head lease control, the Company maintains control of all locations in its Associate owned store network.
Under the Canadian Institute of Chartered Accountants’ (“CICA”) Accounting Guideline 15, “Consolidation of Variable Interest Entities”, the Company consolidates the Associate-owned stores. The individual Associate-owned stores that comprise the Company’s store network are variable interest entities (“VIE”) and the Company is the primary beneficiary.
The Company’s business strategies are designed to drive sales growth, maximize gross margin dollars and operating cash flow, leverage cost reduction opportunities and build customer loyalty. The Company believes that proper execution of its strategies will strengthen its position as the licensor of Canada’s leading drug store group, thereby generating increased revenue and profitability, which, in turn, should enhance long-term shareholder value.
The dedication of the Company’s Associate-owners, combined with its ability to recruit, develop and retain talented pharmacists and technicians, has been, and continues to be, the primary contributor to the Company establishing itself as a leader in the practice of community pharmacy and health. Going forward, the Company intends to build upon this leadership position by continuing to deliver innovative pharmacy products, services and programs, including the introduction in 2010 of its own private label generic drug products marketed under the trademark SANIS™, that aim to improve patient health outcomes, build loyalty with patients and third-party payers, increase market share and enhance profitability.
The Company plans to allocate $360 million to capital expenditures in 2011, with approximately 75% of this amount to be invested in the store network, including any related investments to acquire drug stores, prescription files and land.
Competition
The Company faces competition from many retailers in the front store merchandise and non-prescription drug categories. The Company’s competitors in the retail pharmacy business include independent operators, banner groups, retail chains, mass merchandisers and larger supermarket chains with combination food/drug retail operations. These competitors may reduce prices in front store merchandise or reduce dispensing fees to increase market share, which could have an adverse impact on the Company’s market share and/or earnings.
Third-party Service Providers
The Company is reliant upon third-party service providers in respect of certain of its operations. It is possible that negative events affecting these third-party service providers could, in turn, negatively impact the Company. While the Company has no direct influence over how such third parties are managed, it has entered into contractual arrangements to formalize these relationships. In order to minimize operating risks, the Company actively monitors and manages its relationships with its thirdparty service providers.
Real Estate
Successful implementation of the Company’s growth strategies is dependent upon the Company’s ability to increase the selling square footage of its Associate-owned store network through new store openings and acquisitions, expansions of existing stores and relocations of other stores to superior sites. The availability of suitable store locations and redevelopment opportunities with respect to existing stores, and the lease terms that the Company is able to negotiate in connection with new leases and store upgrading, may impact the Company’s ability to execute its strategic plan to the extent that desirable locations and/or redevelopment opportunities are not available on reasonable commercial terms.
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